1. and Unit 3 – Theory of the Firm

2. 1. single seller in the market. 2. a price searcher -- ability to set price 3. significant barriers to entry 4. possibility of long-run profits

3. Q 0 1 2 3 4 5 6 7 8 9 10 P 24 23 22 21 20 19 18 17 15 13 25 In perfect competition, a single firm faces a ____________ demand curve, because if it increases or decreases production, it is too ________ to affect price. Not so for the the monopolist. The monopolist is the _________ firm producing the good. Its demand curve is the ___________ demand curve. If the monopolist wants to sell more quantity it must ___________ its price. horizontal small only market lower 4 of 22

4. Q 0 1 2 3 4 5 6 7 8 9 10 P 24 23 22 21 20 19 18 17 15 13 25 In written answers you should say…. “The monopolist faces a downward- sloping demand curve.” 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P Q P

5. Q 0 1 2 3 4 5 6 7 8 9 10 P 24 23 22 21 20 19 18 17 16 15 25 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P TR 0 24 46 66 84 100 114 126 136 144 150 In economics, we are not as concerned about total as we are about Marginal What is the formula for marginal revenue? The change in TR / the change in Q MR >24 > > > > > > > > > 22 20 18 16 14 12 10 8 6

6. Q 0 1 2 3 4 5 6 7 8 9 10 P 24 23 22 21 20 19 18 17 16 15 25 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P TR 0 24 46 66 84 100 114 126 136 144 150 MR >24 > > > > > > > > > 22 20 18 16 14 12 10 8 6 Graph MR MR

7. While the demand curves for a monopolist & perfect competitor are ___________, the cost curves are the ________. What is the shape of the MC curve? The ATC? Where do the 2 curves intersect? different same

8. Q 0 1 2 3 4 5 6 7 8 9 10 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR TC 40 50 58 65 75 87 100 115 135 160 190 MC > > > > > > > > > > 10 8 7 12 13 15 20 25 30 Graph MC MC 9 of 22

9. 190 Q 0 1 2 3 4 5 6 7 8 9 10 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR TC 40 50 58 65 75 87 100 115 135 160 MC > > > > > > > > > > 10 8 7 12 13 15 20 25 30 Graph MC MC A monopolist produces where MR = MC and charges a price above this Q (6) on the D curve Q 0 1 2 3 4 5 6 7 8 9 10 P 24 23 22 21 20 19 18 17 16 15 25

10. Q 0 1 2 3 4 5 6 7 8 9 10 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR TC 40 50 58 65 75 87 100 115 135 160 190 MC ATC 50 28 22 19 17 18 19 ATC Graph ATC starting at the 4th unit to the 9th unit. ATC = TC / Q

11. Q 0 1 2 3 4 5 6 7 8 9 10 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR TC 40 50 58 65 75 87 100 115 135 160 190 MC ATC 50 28 22 19 17 18 19 ATC Note: where does MC intersect ATC? ATC = TC / Q

12. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC This monopoly seller produces 6 units (MR = MC) and sells each and every unit for $19. 13 of 22

13. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC Is this monopoly earning an economic profit, and economic loss, or just breaking even? Since the price is above the ATC at the profit- maximizing Q of 6 units, the firm is earning an economic profit.

14. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC Economic Profit is equal to the area, A, 19, B, C. A B C 19

15. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC A B C 19 Since this firm is earning an economic profit, will there be entry into the market place? NO! Since this is a monopoly there will be no entry even though it is earning economic profits.

16. P Q cost quantity S D Q P p MC q that is….the __________of the next one is equal to the __________ of the next one (_____ = ____); both the firm and the consumer are getting the max that they can MR=D=AR=P firm industry In perfect competition firms are allocatively or economically efficient because they produce where MC = MR. cost price MCP

17. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC Explain how the monopolist is NOT allocatively efficient. The monopolist is able to charge a P for the next one that is much higher than the cost of the next one. 18 of 22

18. P Q cost quantity S D Q p ATC MC q MR=D=AR=P market firm P A perfect competitor produces at productive (or technical) efficiency….. where it operates at its minimum _______ producing goods for society at the very lowest ________ of resources for society AVC ATC cost

19. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC Explain how the monopolist is NOT technically efficient. The monopolist does not necessarily operate at the lowest point on its ATC curve; thus it’s providing goods to society at a higher cost of resources than it could.

20. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC Where would the perfect competitor produce? For the perfect competitor the D is the P is the MR, so….. P = $18 Q = 7 21 of 22

21. 24 23 22 21 20 19 18 17 16 15 25 0 1 2 3 4 5 6 7 8 9 10 D = P MR MC ATC Where does the monopolist produce and what price does it charge? P = $19 Q = 6 With a monopoly society is less well off – it’s paying more and having fewer produced. Monopoly results in a misallocation of resources. welfare or deadweight loss